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Legal Update

PRC People's Supreme Court Relies on JSM Legal Opinion in its Recent Judgment

15 April 2009
Mayer Brown JSM Legal Update

The People's Supreme Court has recently delivered judgment in favour of our client (the "Lender") which extended two loans to a borrower incorporated in Mainland China (the "Borrower") based on a Hong Kong legal opinion prepared by JSM.

The case involves the following interesting issues of conflict of laws:

  • whether the Hong Kong governing law clauses contained in the loan agreements should be considered valid;
  • how could a PRC court determine what should be the relevant Hong Kong law; and
  • whether the PRC statute of limitation or the Hong Kong statute of limitation should apply.

In essence, the People's Supreme Court held that Hong Kong law was the governing law of the two loan agreements and the burden of establishing the relevant Hong Kong law lay with the parties. At the end of the day, the People's Supreme Court took the Hong Kong legal opinion into account in rendering its judgment in favour of the Lender. The People's Supreme Court also held that the Hong Kong statute of limitation was to apply.

This marks for the very first time that a Hong Kong legal opinion issued by JSM has been relied upon by the People's Supreme Court as the basis for delivering its judgment.

Facts of the Case

Insofar as relevant to the issues of conflict of laws, the facts are very simple.

The Lender was a company incorporated in Hong Kong and the Borrower was a company incorporated in Mainland China. The Lender extended two loans to the Borrower pursuant to two separate loan agreements. Both loan agreements contained a Hong Kong governing law clause.

At all material times, the Lender did not possess a money lender's licence under the Money Lenders Ordinance (Cap. 163) but the loans were secured on a mortgage over the land use right over a plot of land situated in Mainland China. The mortgage was duly registered with the relevant Land Registry.

Upon the Borrower's default, the Lender commenced legal proceedings against the Borrower in Mainland China. These proceedings were commenced more than two years but less than six years after the Borrower's default. Accordingly, the Borrower argued that the action was time barred under the PRC statute of limitation which provides a limitation period of two years only. At the first instance hearing, the People's Higher Court ruled that the Hong Kong legal opinion then submitted by the Lender was deficient both in form and in substance. It concluded that, in the absence of any evidence showing what was the relevant Hong Kong law, PRC law was to apply in resolving the disputes arising out of the loan agreements.

Both parties appealed the decision of the People's Higher Court. The Lender appointed JSM to act as its expert witness on Hong Kong law. JSM prepared the Hong Kong legal opinion which was then submitted by the Lender to the People's Supreme Court and scrutinised by the parties' lawyers before the collegiate panel of the People's Supreme Court responsible for the conduct of the appeal proceedings.

The Judgment

The People's Supreme Court gave judgment in favour of the Lender and dismissed the Borrower's appeal.

In its judgment, the People's Supreme Court made a number of interesting remarks on the issues of conflict of laws:

  1. the Hong Kong governing law clause was upheld on the basis that such agreed choice of law clause had not violated the mandatory provisions of PRC laws and regulations;
  2. the burden of establishing the relevant Hong Kong law lay with the parties and in case of conflicting views, the People's Court was to resolve the differences;
  3. the Hong Kong legal opinion prepared by JSM on how to interpret and apply Hong Kong law in the subject proceedings could be used as reference materials by the People's Court;
  4. the People's Supreme Court was satisfied that the loan agreements were valid under Hong Kong law (presumably on the basis that the loans extended under the loan agreements were exempted loans within the meaning of Money Lenders Ordinance) as both the Lender and the Borrower were eligible to be parties to the loan agreements; and
  5. based on the PRC law prevailing at the time, the limitation period of the subject proceedings was to be determined by reference to the governing law of the loan agreements which was Hong Kong law. As the limitation period under Hong Kong law was six years, the Lender's action had not been statute-barred.

Conclusion

The case provides very useful guidelines for resolving disputes arising out of a contract governed by foreign law in a PRC court. It is also likely that similar principles will be adopted in arbitration proceedings conducted in China. From a client's point of view, it has been made clear that disputes arising out of a contract governed by foreign law can be resolved by a PRC court applying the foreign law. From a practitioner's point of view, it has been made clear that the principles involved are similar to that employed by a Hong Kong court in resolving disputes arising out of a contract governed by PRC law (i.e., a PRC court applies the foreign law based on the expert evidence adduced by the parties). In a suitable case or project, clients and practitioners may thus work together to explore how to maximise juridical advantages.

For more information, please contact:

Terence Tung ( )
Ellen Liu ( )

Learn more about our PRC offices and Litigation & Dispute Resolution practice.

Authors

  • Terence Tung
    Senior Partner
    T +852 2843 4428
  • Ellen Liu
    Associate
    T +86 10 6599 9265
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